Feature Finance — 11 February 2018

Listed companies in the West Midlands issued a total of 17 profit warnings in 2017, up from 12 in 2016. The final quarter of 2017 saw eight profit warnings, compared to five in the previous quarter and three in the same quarter of 2016, according to EY’s latest Profit Warnings report.

The West Midlands followed the national trend which saw 81 profit warnings in Q4 2017, up from 75 in Q3 and 11% higher than the same quarter of 2016. However, the total number of profit warnings in 2017 (276) was comparable with 2016 when 283 warnings were issued.

This compares with the East Midlands which saw a drop in 2017 profit warnings – 13 compared to 19 in 2016, when the highest number of warnings was reported in the region since 2008.

Overall 2017 was a year of two-halves, with both the number of profit warnings and investor reaction increasing significantly in the final two quarters. Notably, the median share price drop on the day of warning rose from 12% in the first half of 2017 to 14.9% in the second half and 15.2% in Q4 2017 – the highest since the Brexit vote quarter of Q2 2016.

Dan Hurd, Head of EY’s Midlands restructuring team; comments: “An increase in restructurings and profit warnings reflects the pressure building across a significant portion of the Midlands economy. Companies that issue profit warnings are now under greater scrutiny and investors are reacting with less patience, especially in sectors where shareholders view warnings as a sign of deeper issues rather than a one off event.

“In 2018, inflationary pressures may ease, but new challenges are emerging and some existing concerns – most notably Brexit – will come to a head. There are still many opportunities to capture growth; but the cumulative impact of rising costs, slowing growth and increasing competition will continue to expose weaknesses in any company struggling to get a handle on this changing economy.”

According to the report, 30% of all UK profit warnings in 2017 cited cost and competitive pressures, compared to 16% in 2016. Contract uncertainties also continued in 2017, with 25% of companies citing delays or cancellations, including 40% of warnings from the FTSE support sector and 60% from FTSE software & computer services.

Support services brace for a challenging 2018

FTSE support services companies issued 42 UK profit warnings in 2017, ten fewer than 2016, with the increase in oil price helping industrial suppliers. But, from companies in business support services (including outsourcers and contractors), pricing pressures continue to build exposing problem contracts and failures in internal controls.

Dan Hurd, continues: “The support services sector will remain in the spotlight in 2018, with public sector contracts in particular under scrutiny. Slower UK growth may also limit private sector demand, with activity in the construction sector already slowing. But there is still the potential for companies with strong balance sheets and operational infrastructure to make the most of innovation and expand their business in 2018.”

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